Warning: Everyone has a risk tolerance that should not be overlooked.. Any good stock broker or financial planner is aware of this and they should make the effort to help you conclude your risk aversion. Then they should help you identify investments that do not exceed your risk acceptance.
Determining one’s risk tolerance involves several different things. First, you need to know how much money you have to invest and what your investment and financial goals are.
For instance, if you plan to retire in ten years, and you’ve not saved a single cent towards that end, you need to have a high risk tolerance – because you will have to do some aggressive – high-risk – investing in order to reach your financial goal.
Conversely on the other side of the coin, if you are just starting out and you want to start investing for your retirement, your risk tolerance will be very low. You can afford to watch your money grow slowly over time.
Naturally you need to understand that your need for a high risk tolerance or your need for a low risk tolerance really has no sway on how you feel about risk. To reiterate, there is a lot in determining your tolerance level.
For instance, if you invested in the stock market and you watched the movement of that stock everyday and saw that it was dropping slightly, how would you react?
Would you sell out or would you let your money be? If you have a low tolerance for exposure, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!
Again, a good financial planner or stock broker will help you determine the level of risk that you are comfortable with and help you pick your investments appropriately.
Your risk tolerance should be based on what your financial goals are and how you feel about the potential of losing your money. All of this is inseparable and important.
